Each day in our futures group coaching class, we examine the major commodity sectors for patterns that frequently precede breakouts or trends. Our goal is to recognize trend potential, which prepares us to enter trends in the early stages. There are several conditions that must be met before a market can be tagged as high probability trend trade.
First, we look for markets that have below average ranges for 3 to 5 days. Then, we look for severe overlapping or similar prices during that time span. Odds for a breakout increase when a series of opens and closes are near each other. An excellent indicator for that are candlesticks with little or no body.
To get a read on momentum, which often reveals the direction of the coming trend, we refer to the fair or high-volume price. Momentum begins at high volume prices. If the conditions above are met, odds favor a vertical move and the direction of that move is often revealed depending on where the market closes in relation to that fair price.
At the end of every quarter I like to check where stocks are in relation to the high-volume price of the quarter. If the range has been below average and the previous 3 months have seen severe overlapping prices, odds favor an above average rise or decline. Rallies tend to extend higher if a market closes out a quarter above the fair price. Conversely, a settle below the fair price often leads to lower prices over the next few months.
The chart shows quarterly bell curves or profiles (macrograph). Note JPM trended higher until March of this year. Q1 closed below the high-volume price for the first time in over a year and a decline ensued. And it appears that stocks will finish Q2 below the fair price as well.
Of the Dow Jones 30 companies there are some that meet the conditions that favor an above average move in Q3. Those with below average, overlapping ranges and are below the quarterly high-volume price are BA, CAT, JPM, MCD, PFE and WBA.
The one with below average, overlapping ranges in Q2 that is above the quarterly high-volume price is VZ.
When searching for trend type trades in Q3, the best candidates are the stocks above.
There are a few that are hovering around the fairest prices of the quarter, which means momentum is not obvious yet. They are PFE, UTX and WMT.
John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.
